Take back control of your financial life and become the boss of your debts.

Cons

Consolidation is seen as a 'hard check' against your credit, so your credit scoremight suffer in the short-term.

The process will backfire if you fail to spend responsibly, don't cancel your credit cards, and continue to rack up debt.

Option #2: Debt management

Going it alone in life can be tough, and managing your finances is no different.

Do you have a job to keep up with?

A household to run?

Or maybe a family that keeps you busy?

Add ‘managing your debts’ to this equation, and life suddenly becomes that much more hectic.

With so much to juggle, it can be difficult to know what your next step should be.

And when you do have time, how do you know you’re making the right decisions?

It can be a stressful time for any Kiwi.

This is where debt management comes in.

Debt management (also known as credit counselling) sees you enlisting the help of an individual or team to work on your behalf with creditors - that is, the people you owe money to - to negotiate a better deal on aspects of your debt, including:

If you're still unsure, here’s what this means for you in practical terms:

Each and every month, you'll send a payment to your debt manager. Once received, they'll then pay your debts for you.

This process cuts out the hassle, slashes the number of payments you have to make, and frees you up to better spend your time elsewhere.

However, this does beg the question:

‘Why wouldn't I just call the creditors and do this myself?’

The truth is, many New Zealand creditors have special arrangements in place with debt management firms so that they can offer reduced interest rates and repayments if you sign on the dotted line.

TL;DR?

They have access to deals that you aren't able to access on your own.

Pros

Negotiate a better interest rate and a lower monthly repayment.

Gain access to expert advice that can help you improve your current financial situation.

Cons

Debt managers come at a cost, which can be difficult to meet if you’re already struggling to pay off your debts.

There’s no guarantee that a debt manager will be able to negotiate a better deal, so you could be left in the same place as when you started.

Many debt managers will have creditors close your accounts, which will negatively impact your credit score.

Creditors could change the status of your loan from ‘Paid’ to ‘Settled’, which indicates to other creditors that a special arrangement was made and that you didn’t repay your loan in full as originally agreed. This could leave you looking financially unreliable in the eyes of future creditors.

Option #3: Debt settlement

Debt settlement can be a long, drawn out, complicated process.

Here’s how it usually plays out:

Rather than make regular payments towards your debt, a debt settlement company will have you deposit funds into one of their accounts instead.

The company will then use these funds as leverage to negotiate a one-off, lump-sum payoff with your creditors that is, ideally, less than the outstanding balance owed.

But like most things in life, settlement doesn’t always go to plan.

In fact, it's the riskiest of all the options we've explored today.

Why?

Because it's usually the penultimate step before declaring Bankruptcy.

There’s a few reasons for this:

1. You’ll be forced to default on your debts

Debt settlement companies will ask you to default on your debts. That’s right! They’ll ask you to purposely stop making payments to your creditors for as little as a few months or as many as a few years in an effort to gain the upper hand at the negotiating table.

2. Multiple debts multiply the risk factors

Debt settlement becomes that much trickier if you owe money to multiple creditors. How so? Because you’ll need to repeat this process for each and every one. Remember, what works with one, might not work with another.

3. There’s no guarantees

Debt settlement isn’t a ‘one size fits all’ solution. Far from it, in fact! There’s no guarantee that the creditor will accept your offer. As the process doesn't press pause on interest, late payment fees, or other penalties, you could be left in a far worse position than you started.

Pros

Debt settlement firms may be able to negotiate down the amount of debt you owe.

Settlement will have a lower impact on your credit score than filing for bankruptcy.

It can help you avoid asset liquidation, which is often associated with bankruptcy

Cons

It’s a very risky option, which can leave you in a worse position than you started.

The amount of debt that is ‘forgiven’ could be considered as income, which will see you paying income tax on any savings you make.

Interest, fees, and penalties will be added to the amount you owe during the settlement process.

The average time for debt settlement is 2-3 years, which means 2-3 years of fees, interest and added penalties.

Your credit score will suffer, as skipping payments, defaulting on loans, and not paying your debts in full will all be recorded in your report.

Debt settlement companies usually base their fees on the portion of the balance that was settled, which is often as much as 20%. For example, if you save $10,000, You’ll be paying $2,000 in fees.

Debt settlement requires that you have a large sum of cash available out of the gate to give you power at the negotiating table, which isn’t a viable reality for many New Zealanders already struggling with debt.

Creditors can refuse! That’s right: lenders and creditors are not obligated to accept the terms brought to the table, and may reject it outright.

If the settlement process fails, any new charges, fees or interest will remain.

You have the facts, so which is right for you?

In the majority of cases, New Zealanders just like you opt for the safety and security of debt consolidation.

Not only is it largely risk-free, it also boasts numerous benefits (say hello to your new and improved credit score, for one!), cuts down on the stress, and cuts out the paperwork.

It doesn’t get better than that!

If you are considering debt settlement or management as alternatives, just be conscious of the risk factors involved before you proceed.

There's a very real chance you could end up financially worse off, which is why when push comes to shove we recommend debt consolidation time and again.

No matter what choice best fits you finances, it's never been easier to start managing your debts.

Want to know your options?

*Credit Union Baywide trading as NZCU Baywide. Terms and conditions and normal lending criteria apply. A $500 approval fee and other fees apply for home lending. A $250 approval fee and other fees apply for personal lending. All variable rates, fees and returns are subject to change without notice. The current Product Disclosure Statement and other disclosure statements are available here or on request from the Credit Union. NZCU Baywide savings are shares secured by a first ranking security over NZCU Baywide's assets. Click here to view our rates and fees. The CANSTAR 5 Star Rating was awarded in December 2017 to NZCU Baywide for Orange Personal Loans and in June 2017 for our Online Saver account.